by the author of dead companies walking

Tag Archives: Bill Ackman

With yesterday’s 300-point collapse, the Dow is now down 7.3 percent since January 1st. Other indexes have cratered as well. The smaller company Russell 2000 has shed over 11 percent. In the midst of this carnage, investors are understandably searching for “safe haven” stocks that generate dividends, are inexpensive, and offer less volatility than the overall market. Unfortunately, these ports in the storm are few and far between at the moment. People are looking for any excuse to sell stocks right now, which means anyone looking to buy has to be particularly sensitive to headline risk.

Today no sector faces greater headline risk than the biotechnology and pharmaceutical space, especially companies that have engaged in price gouging. In this toxic environment, names like Valeant, Shire, Vertex, BioMarin, and others are the financial equivalent of the Zika virus.

I’ve always been intrigued by how seemingly small events can trigger sudden downturns in overvalued market sectors. In March of 2000, a Barron’s cover story did more than anything to accelerate the bursting of the dotcom bubble. Last week, a single tweet sparked a major selloff in biotechs and pharmaceuticals.

With his billion dollar battle royale against Herbalife entering its fourth year, Bill Ackman is starting to sound a bit punchy. Last week, during an Interview for Bloomberg TV, he likened short-selling to “brain damage” and declared “there are easier ways to make money.”

All I can say is: I feel your pain, Bill!

I don’t bet against powerful corporations with billions in market cap. By and large, the companies I short are beaten down and headed for bankruptcy. But the stocks of sickly firms can stay just as stubbornly high as Herbalife’s has, and they often spike higher for brief spurts even as their underlying businesses erode. Living through these rallies might not cause brain damage, but it’s definitely a major headache.

(note: this post originally appeared last Thursday on my Yahoo! Finance contributor page.)

Last week, a longstanding short in my fund released one of the grimmest quarterly reports I’ve seen in three decades of managing money. The company’s most important sales metric dropped at a double-digit rate, meaning its near-term revenues are going to be abysmal (after all, today’s sales are tomorrow’s revenues). Its long-term outlook isn’t great either because its most profitable product is fast becoming obsolete. Meanwhile, sales rates for new, less profitable products are modest and the business is hobbled by more than $2 billion in debt, all of which is coming due in less than two years. On the plus side, the company still generates a fair amount of cash, almost $400 million last year. Too bad interest payments to service its monstrous debt load were almost as large.

Declining sales, a sunsetting business model and crushing debt. If that isn’t a recipe for bankruptcy, I don’t know what is. Oh yeah, did I mention that this same company has already filed for Chapter 11 protection twice in the last decade?

I’d love to tell you the name of this business. Hell, I just wrote a book called Dead Companies Walking and this is probably the best example of a company heading for oblivion in the market today. But naming it would almost certainly wind up costing me and my investors a ton of money.

The talk of the investment world this past week has been the continuing soap opera at JC Penney. The latest installment has been the feud between board member and New York hedge fund manager Bill Ackman and just about everybody else within the company. Ackman, of course, was the one who convinced the board to hire former Apple retail guru Ron Johnson as CEO—a move that cost the company billions after Johnson disastrously tried to make the venerable retailer into some kind of glorified cross between Saks Fifth Avenue and Urban Outfitters.

After the company finally got rid of Johnson in May, Ackman agreed to bring back former CEO Mike Ullman on an interim basis. But that brief period of harmony vanished this week when Ackman publicly aired his displeasure with Ullman’s leadership. That move was the last straw for the board. They accepted Ackman’s resignation, calling his recent behavior “disruptive and counterproductive.”

Too which I say—”disruptive and counterproductive???” I know corporate boards tend to err on the side of decorum and blandness, but calling Bill Ackman “disruptive and counterproductive” to Penney’s is like calling an arsonist “disruptive and counterproductive” to buildings.

I shorted Penney’s seven months ago. It was a dead company walking then and I still believe it is a dead company walking today. And the person that mortally wounded it was the exact person who caused the latest trouble, Mr. Ackman himself. Ackman has been “disruptive and counterproductive” from day one at Penney’s, and even though he’s gone now, he’s left behind the torched shell of a once great company.

"[Scott Fearon's] insights on the common ways that mature companies often doom themselves apply equally well to start-ups. Every business, young or old, needs to avoid the ... mistakes that he outlines."

About the Author

Scott Fearon has spent thirty years in the financial services industry.
Since 1991, Scott has managed a hedge fund in Northern California that invests in fast-growing companies with little or no Wall Street coverage while shorting the stocks of distressed businesses on their way bankruptcy.